day, when nothing much is going on in the markets, but general
nervousness is running like a low-grade fever (as has been the case for
a while now), there will be a commodities burp: A slight but sudden
rise in the price of a necessary commodity, such as oil.
will jiggle Treasury yields, as asset managers will reduce their
Treasury allocations, and go into the pressured commodity, in order to
catch a profit. (Actually it won’t even be the asset managers—it will
be their programmed trades.) These asset managers will sell Treasuries
because, effectively, it’s become the principal asset they have to sell.
won’t be the volume of the sell-off that will pique Bernanke and the
drones at the Fed—it will be the timing. It’ll happen right before a
largish Treasury auction. So Bernanke and the Fed will buy Treasuries,
in an effort to counteract the sell-off and maintain low yields. They
want to maintain low yields in order to discourage deflation. But
they’ll also want to keep the Treasury cheaply funded. QE-lite has
already set the stage for direct Fed buys of Treasuries. The world
didn’t end. So the Fed will feel confident as it moves forward and nips
this Treasury yield jiggle in the bud.
Fed’s buying of Treasuries will occur in such a way that it will
encourage asset managers to dump even more Treasuries into the Fed’s
waiting arms. This dumping of Treasuries won’t be out of fear, at least
not initially. Most likely, in the first 15 minutes or so of this
event, the sell-off in Treasuries will be orderly, and carried out with
the idea (at the time) of picking up those selfsame Treasuries a bit
cheaper down the line.
the Fed will interpret this sell-off as a run on Treasuries. The Fed is
already attuned to the bond market's fear that there’s a “Treasury
bubble”. So the Fed will open its liquidity windows, and buy up every
Treasury in sight, precisely so as to maintain “asset price stability”
and “calm the markets”.
The Too Big To Fail
banks will play a crucial part in this game. See, the problem with the
American Zombies is, they weren’t nationalized. They got the best bits
of nationalization—total liquidity, suspension of accounting
and regulatory rules—but they still act under their own volition, and
in their own best interest. Hence their obscene bonuses, paid out in
the teeth of their practical bankruptcy. Hence their lack of lending
into the weakened economy. Hence their hoarding of bailout monies, and
predatory business practices. They’ve understood that, to get that
sweet bailout money (and those yummy bonuses), they have had to play
the Fed’s game and buy up Treasuries, and thereby help disguise the
monetization of the fiscal debt that has been going on since the Fed
began purchasing the toxic assets from their balance sheets in 2008.
they don’t have to do what the Fed tells them, much less what the
Treasury tells them. Since they weren’t really nationalized, they’re
not under anyone’s thumb. They can do as they please, and they have
boatloads of Treasuries on their balance sheets.
the TBTF banks, on seeing this run on Treasuries, will add to the panic
by acting in their own best interests: They will be among the first to
step off Treasuries. They will be the bleeding edge of the wave.